The U.S. workforce saw an average of nearly 4 million resignations a month in 2021, a new annual record. That trend, dubbed “The Great Resignation,” is expected to continue into 2022.
When employees change jobs, those who participate in a defined contribution retirement plan must decide what to do with their existing account. Do they leave the account with their former employer’s plan? Roll the account over into an individual retirement account? What about their new employer’s plan (if they have one)? Or do they cash out?
“As financial professionals, we must be ready to guide our clients through this very important financial decision,” writes George Schein, technical director, advanced consulting group, at Nationwide Retirement Institute, in a recent blog post. “In doing so, it will be important to help clients think through their current investments and strategy and their unique life circumstances to guide them towards the option that is best for them.”
Leaving a retirement plan account in a former employer’s plan is the easiest course of action and may make sense if clients are happy with their current investments and plan service-provider.
However, large employers may sometimes charge former employees higher administrative and maintenance fees than what they charge their current employees. In that case, a client may find lower fees by rolling their retirement plan account over into either an IRA or their new employer’s retirement plan if a plan is offered.
Schein notes that rolling over a retirement plan account after changing jobs is common. Choosing between rolling over the account to an IRA or a new employer plan depends on several factors.
In addition to potentially lower costs compared to many DC plans, IRA’s also offer nearly limitless investment options.
Another benefit of rolling over an account from a former employer’s retirement plan is the ability to consolidate retirement accounts. Consolidating their DC plan accounts into an IRA offers clients better control over partial distributions. Rolling over into an IRA can also offer many tax-planning strategies.
And while there are many reasons to roll over a DC plan account from a former employer into an IRA, there are also factors that may make rolling over an existing retirement plan account into the retirement plan of a client’s new employer a better option.
For example, the Employee Retirement Income Security Act of 1974 shields employer plans from creditors. Meaning if someone wins a judgment in court against a client, that creditor can’t access the client’s assets held in their employer’s retirement plan. IRAs don’t offer that same level of protection.
When rolling over an existing DC plan account into a new employer’s plan, other things include whether the new employer’s plan has low fees and investment options the client likes or if a client’s new employer’s plan allows participants to take loans from rolled over amounts.
Cashing out a retirement plan account when leaving employment should be avoided, if possible. Unless a client is at least 55 when they leave their current job, cashing out their plan account will incur a 10% early-withdrawal tax, which will be added to the amount of income tax that will also be due on the amount cashed out of their retirement plan.
“Changes in employment are often an exciting time for clients. Yet these job changes also present clients with important financial decisions that can also cause them stress and anxiety,” adds Schein. “Being able to help clients evaluate their financial goals and strategies to help them choose the best of the options described above is critically important to help instill confidence and nurture an ongoing client relationship.”
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